5.3 Linear regressions

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Foreign Independent Board members in Corporate Boards of Listed Firms

Empirical evidence from firms located in BRIC countries 57

5.3 Linear regressions

It could very well be that the moderating effect of hypothesis 1b, 2a or 2b has an effect on the relation between the number of FIDs and firm performance. These hypotheses only focused on 111 firms of the entire sample – only the 111 firms that have FIDs (tables 17a, 17b, 18a, 18b, 19a and 19b have used this smaller sample of 111 firms, thus n=111). Hypothesis 1b investigates the impact of the FIDs country of residence (domiciled in developed or emerging economy) on firm performance. A linear regression is performed for this hypothesis. Table 17a and 17b reveal the results for the performed regressions of hypothesis 1b. The regressions show that both models are insignificant. Consequently, the results are not interpretable and, therefore, it is not possible whether to support hypothesis 1b or not.

Table 17a

Linear regression analysis FIDs country of residence (ROA) (n=111)

Table 17b

Linear regression analysis FIDs country of residence (ROE) (n=111)

Hypothesis 2a investigates the impact of firms that are listed on both a domestic and foreign stock exchange and firms that are only listed domestically, both on firm performance. Hypothesis 2b investigates the impact of firms with foreign subsidiaries and firms without foreign subsidiaries, both on firm performance. A linear regression is performed for both hypotheses. Tables 18a and 18b reveal the results for hypothesis 2a, whereas tables 19a and 19b reveal the results for hypothesis 2b. It appears that the moderating effect of foreign listing on ROE is insignificant, whereas the model for ROA is insignificant. However, several control variables (prior ROA and prior ROE) in table 18b show a highly significant effect on ROE. Furthermore, it is notable that the R2 in model 2 and 3 rise considerably when the independent and moderating variable are added. The variables in model 2 and 3 explain for

Sum of Squares df Mean Square F Sig.

Regression 186,525 3 62,175 1,568 0,201

Residual 4243,71 107 39,661

Total 4430,236 110

Regression 3315,06 3 1105,02 0,174 0,914

Residual 679436,288 107 6349,872

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Empirical evidence from firms located in BRIC countries 58 roughly 50% the effect on ROE. However, the significance of the model is most likely caused by prior ROA and prior ROE as all other variables are insignificant.

Table 18a

Linear regression analysis Foreign listing (ROA) (n=111)

Table 18b

Linear regression analysis Foreign listing (ROE) (n=111)

†. Coefficient is significant at level p < 0.10 level (2-tailed).

*. Coefficient is significant at level p < 0.05 level (2-tailed).

**. Coefficient is significant at level p <0.01 level (2-tailed).

Regression 140,581 3 46,86 1,169 0,325

Residual 4289,655 107 40,09

Total 4430,236 110

Variables

Model 1

Model 2

Model 3

Control variables

Board size

-,023

-,048

-,047

Board independence

,013

,019

,190

CEO Duality

-,046

-,063

-,069

Firm age

,006

-,006

-,087

Prior ROA

_,099

†

-,693

**

-,595

**

Prior ROE

_,292

**

1,113

**

,922

**

Firm size employees (ln)

,053

,145

,081

Firm size assets (ln)

,048

-,137

,030

Independent variables

Percentage FIDs

,060

,003

Moderating effect

Foreign listing

-,238

Percentage FIDs * Foreign

listing

,170

R2

,131

,436

,502

F-value

_7,996

**

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Empirical evidence from firms located in BRIC countries 59 Table 19a shows that the moderating effect of foreign subsidiaries is insignificant on ROA. The only significant (control) variables in table 19a are prior ROA and prior ROE. Again it is interestingly to notice that the R2 _{in model 3 rises considerably when the}

moderating variable is added. Instead of explaining 32% of the factors that effect on ROA it rises to 67% when the moderating variable is added (which is very high). Unfortunately, the results for hypotheses 2a and 2b are partly interpretable due to insignificant models. Therefore, it is not possible for these results whether to support hypothesis 2a and 2b or not. In addition, the moderating variables are insignificant for respectively ROE (hypothesis 2a) and ROA (hypothesis 2b). Therefore, both hypotheses are partly not supported (table 18b and table 19a).

Table 19a

Linear regression analysis Foreign subsidiary (ROA)

†. Coefficient is significant at level p < 0.10 level (2-tailed).

*. Coefficient is significant at level p < 0.05 level (2-tailed). **. Coefficient is significant at level p <0.01 level (2-tailed).

Variables

Model 1

Model 2

Model 3

Control variables

Board size

,029

,030

,039

Board independence

-,028

-,029

,058

CEO Duality

,044

,116

Firm age

-,010

-,009

,107

Prior ROA

_,307

**

,306

**

,813

**

Prior ROE

_,355

**

,355

**

-,016

Firm size employees (ln)

,049

,048

,096

Firm size assets (ln)

-,034

-,035

-,012

Independent variables

Percentage FIDs

,012

,058

Moderating effect

Foreign subsidiary

,127

Percentage FIDs * Foreign

subsidiary

,059

R2

,323

,672

F-value

_25,256

**

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Table 19b

Linear regression analysis Foreign subsidiary (ROE)

The last three hypotheses (3a, 3b and 4) are slightly different because they investigate the effect on FIDs instead of firm performance. Hypotheses 3a and 3b have been added to this Master Thesis because it appears that both foreign listing and having foreign subsidiaries are correlated with FIDs (see table 16 correlation matrix). Furthermore, hypothesis 4 has been formulated because the BRIC countries are characterised with high levels of concentrated ownership. Table 20 shows that only foreign subsidiary has a positive and significant effect on FIDs percentage. The other two variables are not significant. However, the effect of the variable foreign subsidiary is significantly low because the R2 is only 0.18, which means that the effect on FIDs is really weak. Nevertheless, hypothesis 3b can be supported and hypotheses 3a and 4 are both not supported. Finally, it should be noted that all models and variables did not show any sign of multicollinearity.

Table 20

Linear regression analysis on % FIDs (n=801)

†. Coefficient is significant at level p < 0.10 level (2-tailed). *. Coefficient is significant at level p < 0.05 level (2-tailed). **. Coefficient is significant at level p <0.01 level (2-tailed).

Variables

Beta

Sig.

Independent variables

Ownership concentration

,058

,103

Foreign subsidiary

_,102

**

_,004

Foreign listing

,043

,236

R2

,018

F-value

_4,798

**

_,003

FIDs

Regression 1869,298 3 623,099 ,098 ,961

Residual 680882,049 107 6363,384

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6 Discussion and conclusion

This chapter presents the discussion and conclusion part of this Master Thesis and gives possible explanations for the findings. Eventually, the encountered implications and limitations of this Master Thesis are presented, concluding with suggestions for future research.

6.1 Discussion and conclusion

The purpose of this Master Thesis was to investigate the effect of FIDs on the performance of a firm located in one of the BRIC countries (EEs). Several studies have focused on the relation between FIDs and their contribution to firm performance. However, these studies have always focused on developed economies and have ignored to investigate this relation for an emerging economy. Therefore, the aim of this Master Thesis is to contribute by providing empirical evidence regarding the prevalence of FIDs in BOD of firms from the BRIC countries and whether or not FIDs are positively related to firm performance.

The results presented in Chapter 5 Data and results indicate that only a small proportion of the firms have incorporated FIDs in their BOD (13,9%). The average board size in this sample is 8.3 board members. Furthermore, from all the board members in this sample roughly 41% is regarded as independent but only 2.96% is characterised as FIDs. This implies that BOD are fairly represented by independent directors, because according to Chakrabarti et al. (2008); Guo et al. (2013); Rajagopalan, and Zhang (2008) at least one third of the board members in the BOD should be characterised as independent directors.

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Empirical evidence from firms located in BRIC countries 62 the empirical results obtained in the previous chapter show an insignificant effect for the relation between FIDs and firm performance (hypothesis 1a). This could mean that there is simply no relation between FIDs and firm performance. Another explanation could be that the phenomenon of FIDs in the context of EEs is still relatively new, and that these types of board members still need more time to significantly prove their potential value in relation to firm performance.

The model of Hypothesis 1b appeared to be insignificant. Consequently, the results were not interpretable and, therefore, it was not possible whether to support hypothesis 1b or not. This is no surprise because hypothesis 1b investigated the moderating effect of whether or not the country of residence (developed or emerging economy) of the FIDs has an effect on the (main) relation between FIDs and firm performance (hypothesis 1a). However, the relation between FIDs and firm performance already turned out to be insignificant, thus it would have been a surprise that the country of residence of the FIDs would have made a difference for the relation posited in hypothesis 1a.

The relations posited in hypotheses 2a and 2b appear to be significantly correlated with FIDs percentage (Table 16 Correlation matrix), which could imply that the moderating effects in hypothesis 2a and 2b are significant on the relation between FIDs and firm performance. However, the performed regressions indicated (table 18b and 19a) that both moderating effects were insignificant on the relation between FIDs and firm performance. The moderating effects could have influenced the percentage of FIDs in a firm, however, as mentioned above FIDs appeared to have no influence on firm performance. This could be one of the reasons why the moderating effects of hypothesis 2a and 2b did not show an effect on firm performance.

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Empirical evidence from firms located in BRIC countries 63 that only having foreign subsidiaries is significant on the percentage of FIDs in a BOD. The other two variables were not significant anymore. A possible explanation could be that other variables influenced the variables of foreign listing and ownership concentration – as the significance of both correlations were weak.

6.2 Implications

The implications in this Master Thesis make contributions to existing literature on FIDs and corporate governance. Existing research has focused on the relation between FIDs and firm performance in the context of developed economies. This Master Thesis has focused on this relation but focused on EEs (BRIC countries) instead of developed economies. Furthermore, it appeared that the existing research base on FIDs, as part of the studies on corporate governance, which are related to BOD is relatively low (even for developed economy context). In addition, the results of existing research are ambiguous and leave room for debate (Masulis et al., 2012; Oxelheim, and Randoy, 2003; Oxelheim et al., 2013), which emphasises the need for more empirical research on this topic.

The study of Oxelheim et al. (2013) investigated board internationalisation of Nordic firms and found that the internationalisation of a BOD is positively and significantly related to the degree of internationalisation of the firm in question. The empirical evidence provided in this Master Thesis implies that firms with foreign subsidiaries have a higher degree of FIDs in a BOD. Therefore, this Master Thesis extends and supports the above findings of Oxelheim et al. (2013).

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6.3 Limitations and recommendations for future research

Considering the findings on FIDs in BOD of listed firms located in one of the BRIC countries, it is also necessary to account for several limitations in order to give suggestions for future research purposes.

The first limitation concerns the availability of data. The Orbis database was used as the primary data source for this Master Thesis. However, it appeared that more and more data necessary for this Master Thesis was either inaccurate or missing. Consequently, annual reports of 1420 firms were used to gather the inaccurate and/or missing data. Due to the combination of time-constraint and lack of data, certain variables were not defined using the most optimal methods. For example, the BvD Independence Indicator was used to determine ownership concentration, only made a cut-off at 50% instead of 33%. It would have been more applicable to have the exact percentages of shares per individual or firm to determine ownership concentration.

Consequently, the second limitation in this Master Thesis is the sample. Initially, the focus would have been on the four BRIC countries, however, after the selection criteria a sample size of 807 firms remained but this sample only contained 6 Brazilian firms. Eventually, Brazil was excluded from the sample and this Master Thesis only focused on listed firms located in Russia, India and China.

The third limitation in this study is that only 111 firms from the total sample size of 801 firms have FIDs in their BOD. In addition, the accumulative amount of FIDs in these 111 firms is roughly 200 FIDs, from which 75% domiciled in developed economies and 25% domiciled in EEs. The combination of a greater sample and a better distribution of FIDs domiciled in either developed or emerging economy could have established more reliable evidence on the relation between FIDs and firm performance.

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Empirical evidence from firms located in BRIC countries 65 located in Brazil, as this Master Thesis was not able to do so. Furthermore, to increase the reliability of this Master Thesis future research could increase the sample size by including more firms. The reliability could also be increased using a more optimal method to investigate ownership concentration. Because in this Master Thesis a cut-off of 50% was used but it would be more reliable to determine and compare the exact proportion of shares per shareholder to determine ownership concentration. Another suggestion for future research is the focus on listed firms’ BOD that are located in other EEs. By exploring other EEs the acquired (empirical) findings can be used for comparative purposes. In addition, the current base of empirical evidence for the prevalence of FIDs and their potential impact on firm performance can be extended.

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Appendices

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Appendix I: Structure of BOD and MT

Figure I

Structure of Board of Directors and Management Team

Board of Directors (BOD)

- Chairman of the Board of Directors (executive- or non-executive director) - Secretary (executive- or non-executive director)

- Board members (executive- or non-executive directors)

Management Team (MT)

- Chief Executive Officer (CEO) - Chief Financial Officer (CFO) - Chief Operating Officer (COO) - Chief Information Office (CIO) ...

Planning Finance

Human

Resource IT

Managers

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Appendix II: Agency theory

Figure II

The Principal-Agent problem

(Source: McCarthy, 2014)

Figure II shows the Principal-agent problem. Principals hire agents to run the daily business of the firm in order to achieve a performance. However, agents generally have more information about the daily practices than principals, as information asymmetry between the agents and principals exists. The principals act in their own interest because they appoint suitable agents in order to maximise profits. Agents on their turn may act in their own interests, and due to information asymmetry principals may not notice this.

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Figure III

Incentive alignment of Agents and Principals

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Appendix III: Ways to reduce agency costs

Table I

Incentive alignment to reduce agency costs

Methods for Incentive

alignment

Description

Cash bonuses - Cash bonus when specified goals are achieved

Share plans - Managerial interests are aligned with a financial stake in

the firm

Stock options - The right to buy shares at a specified moment in the

future, for a fixed price

Temporary contracts - When contracts are for a limited duration, and are

renewed only if the required performance is attained (Source: McCarthy, 2014)

Table II

Monitoring to reduce agency costs

Methods for

Monitoring

Description

Internal - By shareholders, when there are a few shareholders with large shares

- By non-executive directors, vis-à-vis outside directors, FIDs

- By a Two-tier board system, the executive board (the management team) and BOS

External - By an auditing firm, who can block a firms’ management its access to capital

- By stock analysts, who monitor performance, in an attempt to predict future behaviour. Their opinions effect share price. As a result, shareholders will ask questions when the share price drops, thus reducing the

information asymmetry

Competition based - By competition between managers, for instance, when small managers are looking for bigger jobs

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Appendix IV: Firm performance measurements

Table III

Description of firm performance measurements

Measurement

Description

Tobin’s Q - The ratio of the market value of assets to their book value (Adam

et al., 2010).

- “The market value of firm equity plus the book value of firm assets minus the book value of firm equity, all divided by the book value” (Oxelheim et al., 2013:192).

ROA - Calculated by dividing a company’s net income by its total assets. - ROA can display how efficient assets are used to generate profit.

ROE - Calculated by dividing a company’s net income by its total equity.

- ROE displays how much firm profit is generated in comparison to the amount of investments made by shareholders.